What does ‘no credit’ mean?
If you’ve never borrowed money before, or have few outgoing payments, you might have a very limited credit history. Or even no credit history at all. This isn’t the same as bad credit - this is when you have a low credit score due to late or missed payments, being at a credit limit, or having defaults, County Court judgements (CCJs), or Individual Voluntary Arrangements (IVAs).
Your credit score shows lenders how financially reliable you are, and how likely you are to make repayments on time. So if you have no credit history, it’s not obvious to lenders if they can rely on you to pay back the loan - even if you know you can. As a result, some lenders might be reluctant to offer you finance at all.
Can I get a car loan with no credit?
Don’t worry - having no credit doesn’t necessarily mean you won’t get finance. But lenders are likely to offer you finance options which carry as low a risk as possible to them. This may also affect what interest rate you can get, your monthly repayments, or your repayment time scale.
Hire-purchase agreements and non-status leases are specific car finance plans. You’re essentially renting the car, instead of owning it; the car is yours at the end of a hire-purchase agreement, but not at the end of a non-status lease. Here, you either pay the remaining value of the car in order to keep it, or give the car back. Either way, you only own the car once all the required payments have been made.
Secured personal loans
A secured personal loan requires you to put down something valuable you own as collateral for the loan. This means that if you fail to make payments, the lender has something they can repossess as compensation for their losses. Secured personal loans are not specific car finance plans, so you could also use one to cover other expenses (like car insurance).
A guarantor loan is another personal finance option. Here, someone you know will co-sign your loan, and vouch that you will be able to repay - becoming your loan guarantor. If you miss too many payments, it allows the lender to contact your guarantor to make payments on your behalf - but this only happens if the situation has become serious.
With these loans, you’ll be able to own the car straight away, without putting anything else down as collateral. These are a great option if you are confident you’ll be able to repay on time - then the guarantor is purely adding strength to your application.
To secure car finance with no credit, lenders may need you to:
- Be on the electoral roll
- Have a driving licence
- Provide proof of address - this can often be done with a bank statement or utility bill
- Prove affordability - lenders may ask about your earnings to make sure you can afford repayments. So getting a cheaper car with lower repayments may help your chances of getting approved with no credit.
How can I improve my credit score?
So you’ve got your car loan, but still want to improve your credit score? There are a couple of actions you can take to jump start your credit rating.
1. Make sure you’re on the electoral roll
Being on the electoral roll can prove to lenders that any information you’ve given them is correct. They’ll be able to confirm your identity, and it helps protect you - and them - against fraud. Generally, the more confident lenders are in the information they have, the more confident they usually are in lending money.
2. Pay any existing bills on time
Especially your car loan! But this can be any phone or utility bills, plus any other subscriptions you might have - like Netflix, Spotify, or a gym membership. Paying bills by direct debit can also help make sure you don’t miss repayments - just make sure you have enough in your bank account each month to cover them.
3. Get a capped credit card or credit-building card
These cards can have a low spending limit but high interest rate - eg a £50 limit with a 30% interest rate. You could use these for smaller bills that you know you can pay off, like your mobile phone bill. These cards have been created by banks and lenders specifically to help people establish a credit file and maintain healthy spending habits - the low credit limit means they're usually happy to lend to people without a credit history, as the risk to them is low.
This will show any future lenders that you have a healthy credit file and a history of making timely payments. Plus, the high interest rates mean the longer you wait to repay, the more you’ll be repaying - so there's a strong incentive to stay on top of payments!
Having no credit history won’t stop you getting a car loan, but it may restrict what you’re offered. Some lenders might treat you like someone with bad credit - so choose a loan you know you can repay on time that will get you the car you want.
ChooseMyCar Staff Writer
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